CES Qualified Intermediary Role & Responsibilities 1 — Questions and Answers
Question 1: What is the primary role of a Qualified Intermediary (QI) in a 1031 exchange?
- To provide legal advice to the taxpayer
- To hold exchange proceeds and facilitate the exchange to avoid actual or constructive receipt by the taxpayer (Correct answer)
- To appraise the relinquished and replacement properties
- To negotiate the purchase price of the replacement property
Correct answer: To hold exchange proceeds and facilitate the exchange to avoid actual or constructive receipt by the taxpayer
The QI holds the exchange proceeds and acts as the intermediary to ensure the taxpayer does not have actual or constructive receipt of the funds.
Question 2: Who is expressly disqualified from serving as a QI under Treasury Regulations?
- A licensed title company
- The taxpayer's real estate agent from a prior transaction more than two years ago
- The taxpayer's attorney who represented them in the last two years (Correct answer)
- An independent exchange company
Correct answer: The taxpayer's attorney who represented them in the last two years
Disqualified persons include the taxpayer's employee, attorney, accountant, investment banker, or real estate agent if they served the taxpayer within the two-year period preceding the exchange.
Question 3: What document does the QI use to acquire the rights to the relinquished property without taking title?
- A trust deed
- An assignment agreement (Correct answer)
- A deed of reconveyance
- A purchase option agreement
Correct answer: An assignment agreement
The QI uses an assignment of the taxpayer's rights under the sale contract to step into the exchange without taking title to the property.
Question 4: Where must the QI hold 1031 exchange proceeds?
- In a co-mingled company operating account
- In a segregated, separate account, trust, or escrow for each exchanger (Correct answer)
- In a federally insured savings account in the QI's name
- In the taxpayer's personal escrow account
Correct answer: In a segregated, separate account, trust, or escrow for each exchanger
Best practices and many state regulations require QIs to hold funds in separate, segregated accounts for each exchanger to protect client funds.
Question 5: What is 'constructive receipt' in the context of a 1031 exchange?
- The physical receipt of the deed to the replacement property
- When the taxpayer has control over or the ability to access the exchange proceeds (Correct answer)
- When the QI delivers wire proceeds to the closing agent
- The transfer of title at closing of the relinquished property
Correct answer: When the taxpayer has control over or the ability to access the exchange proceeds
Constructive receipt occurs when the taxpayer has the ability to control, pledge, or demand the exchange funds, which would disqualify the exchange.
Question 6: What must the exchange agreement between the taxpayer and QI restrict to prevent constructive receipt?
- The taxpayer's ability to select replacement property
- The taxpayer's access to exchange funds except upon completion of the exchange, exchange failure, or expiration of the exchange period (Correct answer)
- The QI's ability to invest exchange funds
- The taxpayer's right to file Form 8824
Correct answer: The taxpayer's access to exchange funds except upon completion of the exchange, exchange failure, or expiration of the exchange period
The exchange agreement must limit the taxpayer's access to proceeds to specific triggering events that do not compromise the exchange.
CES Qualified Intermediary Role & Responsibilities 1
What is the primary role of a Qualified Intermediary (QI) in a 1031 exchange?